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EU energy market design – what you need to know

IN DEPTH | The European Commission’s plan for a new kind of electricity market built around renewables could revolutionise how the continent — and perhaps the world — creates, supplies and balances its energy, writes Leigh Collins in London

The European Commission’s so-called winter energy package, released at the end of November, may be one of the most important set of policy documents in the history of the electricity industry.

Essentially, it is an ambitious attempt to change the way the energy market has always operated, so that fossil-fuel-fired power — which has been the backbone of the industry for more than 100 years — can be successfully and economically replaced by renewable energy.

If approved — by at least 55% of member states representing at least 65% of the total EU population — the package would come into force across the bloc on 1 January 2020, ushering in a new kind of electricity market that may become a blueprint for the rest of the planet — and be a powerful weapon in the fight against climate change.

While the 4,300-plus pages contain policies on everything from biofuels and transport to research and energy efficiency of buildings, the areas that will directly affect the wind and solar industries can be split into two categories: those that set new rules and guidelines for national energy policies; and those that set out the new design for an EU-wide energy market.

Energy market design

Among the 92 documents unveiled on 30 November are a series of rules for a new energy market design, which can be broken down into several overlapping areas: balancing and intra-day markets; increased interconnection between countries; “regional operational centres” for cross-border transmission and grid stability; regulations to encourage distributed power, self-consumption, storage and demand response; priority dispatch; and rules to discourage capacity mechanisms that pay power producers to keep plants on standby.

Balancing and intraday markets

The way that energy is bought and sold inside the EU will change, most notably through the introduction of balancing markets.

To balance their networks, grid operators currently rely on a range of back-up solutions to ensure they can access last-minute injections of energy when needed, such as pumped-hydro and gas-fired capacity.

But the European Commission (EC) sees these bilateral deals as inefficient, anti-competitive and overly reliant on fossil fuels.

Introducing a balancing market removes these problems and ensures that grid operators buy their last-minute energy boosts on the open market at a price that “reflects the real-time value of energy”.

Significantly, such a system allows the participation of wind and solar generators, industrial storage providers, and even businesses and consumers through energy storage and demand response.

The new internal market regulation proposals specify that balancing markets will “be organised in such a way as to ensure effective non-discrimination between market participants, taking account of the different technical capability of generation from variable renewable sources and demand-side response and storage”.

Intraday and day-ahead markets will also be organised along similar lines, with “minimum bid sizes of 1MW or less to allow for the effective participation of demand-side response, energy storage and small-scale renewables”.

Increased interconnection

One of the keys to redesigning the energy markets is increasing the capacity and availability of interconnections — namely, grid links between countries. This would improve the ability to transport renewable energy, help balance grids and increase competition — thus lowering costs.

The EC says that existing interconnectors are currently being underused due to the focus on national markets, so capacity and energy available on one side of a border is not being transferred to where it might be needed.

“Barriers to cross-border electricity flows and cross-border transactions on electricity markets and related services markets shall be avoided,” states the new internal market directive. “Market rules shall provide for regional co-operation where effective.”

The EC is also calling on all member states to have interconnection in place that allows 15% of their total national electricity output to be exported to neighbouring countries.

“Efficient decarbonisation of the electricity system via market integration requires systematically abolishing barriers to cross-border trade to overcome market fragmentation and to allow [European] Union energy customers to fully benefit from the advantages of integrated electricity markets and competition,” the document says.

Regional operational centres

As part of the move to improve cross-border efficiency, “regional operational centres” (ROCs) will be set up to ensure “optimal utilisation of the grid and better grid stability”.

So rather than a single EU entity overseeing all the national transmission networks, the bloc will be split into an as-yet-unspecified number of cross-border regional bodies — the number and location of which will be determined by the European Network of Transmission System Operators (Entso-E).

These ROCs would ultimately be responsible for matters such as network planning, reserve capacity and energy forecasting across their respective regions.

Such a focus should allow greater interconnection and boost cross-border competition over the medium to long term.

More power to the consumer

In what is perhaps the most significant line in the whole package, the internal market directive states: “All generation, storage and demand resources shall participate on [an] equal footing in the market.”

It goes on to explain: “To provide for a level playing field between all market participants, network tariffs should be applied in a way which does not discriminate between production connected at the distribution level with regard to the production connected at the transmission level, either positively or negatively. They should not discriminate against energy storage, and should not create disincentives for participation in demand response...”

And as we have already seen, consumers will also be able to participate in the new balancing and intraday markets.

Significantly, there will be additional financial incentives for such participation through the removal of price caps on wholesale energy. This will create “scarcity pricing” — high market prices in times when utilities are struggling to find enough energy to meet demand.

“Effective scarcity pricing will encourage market participants to be available when the market most needs it and ensures that they can recover their costs in the wholesale market.”

Additionally, to help consumers take part in these markets (and improve their own energy efficiency), member states will have to provide smart meters to — at the very least — those who want them.

Furthermore, the EC wants to enable “collective self-consumption” for people living in apartment blocks — and for communities to be able to build their own renewables projects. This will require additional, as-yet-undefined rules to allow small communities to compete in tenders with large corporations (although there is no further detail about what such rules might entail).

And to further support distributed generation, storage and demand response — and to ensure that distribution networks are operating optimally and competitively — a new EU-wide oversight entity for distribution system operators will be created.

Capacity mechanisms

Several EU countries have regional and national capacity mechanisms in which utilities are paid to keep underutilised generation capacity on line, to be used in times of need. This capacity generally consists of fossil-fuel power plants — mainly gas, but also coal.

The EC does not like such mechanisms, viewing them as inefficient in terms of energy use and costs, and effectively subsidising the use of polluting fossil fuels.

In the internal market regulation proposal, the commission suggests that “regulatory distortions” are often behind the decision to introduce capacity mechanisms, which can largely be solved by importing electricity from neighbouring countries.

“The most efficient remedies to national generation deficits are often regional solutions, allowing Member States to benefit from generation surpluses in other countries,” the document states. “A co-ordinated European adequacy assessment should therefore be introduced, following a jointly agreed methodology, in order to obtain a realistic picture of possible generation needs, taking into account the integration of electricity markets and potential flows from other countries.”

Demand response should also be put to “maximum use”, with capacity mechanisms only being introduced as a last resort, and “designed so as to minimise distortions to the internal market”.

New power plants will only be eligible to participate in capacity mechanisms if their emissions are below 550 grams of CO per kWh. Dirtier power plants currently being utilised in such schemes will not be allowed to participate within five years of the directive coming into force.

In the medium to long term, all capacity mechanisms will be eliminated.

“When fully embedded in the market structure, short-term markets and scarcity pricing will contribute to the removal of other measures, such as capacity mechanisms, to ensure security of supply,” the document states.

Priority dispatch

One of the most controversial elements of the energy package has been the abolition of priority dispatch — a rule that ensures that output from renewables projects enters the grid ahead of electricity from non-renewable plants.

Yet the likely impact of this new rule may have been overstated.

For a start, priority dispatch will continue for all existing capacity and projects completed before 1 January 2020, as well as deployments under 500kW (up to 2025). Projects demonstrating “innovative technologies” will also be exempt.

The new regulations also state that renewables should only be curtailed as a last resort — only if overall power output is so high that switching off fossil plants isn’t enough.

“Generating installations using renewable energy sources shall only be subject to downward redispatching or curtailment if no other alternative exists or if other solutions would result in disproportionate costs or risks to network security,” says the internal market regulation document.

Crucially, compensation will be paid to the owner of the curtailed renewables facilities by the system operator, meaning that it would not be in the latter’s interests to prevent wind and solar power reaching the grid.

The amount of compensation will be “at least equal to the highest of the following elements”: additional operating cost incurred by the project owner, or “90% of net revenues from the sale of electricity on the day-ahead market that the generating or demand facility would have generated without the curtailment or redispatching request”.

Impacts on national policies

Despite noting that the European Parliament called for an energy mix of 30% renewables by 2030, the new energy union regulation document sets an official binding target of “at least 27%”.

Yet how this will work in practice is unclear , as individual countries will not be set binding national targets.

“A target defined at the [European] Union level would leave greater flexibility for Member States to meet their greenhouse gas reduction targets in the most cost-effective manner in accordance with their specific circumstances, energy mixes and capacities to produce renewable energy,” the document argues.

Instead, member states will have to submit ten-year “integrated national energy and climate plans” by 1 January 2019, with a draft version submitted to the EC by 1 January 2018. “Member States shall take utmost account of any recommendations from the Commission when finalising their integrated national energy and climate plan,” the document states. Progress reports will then have to follow every two years.

“The national plans covering the first period from 2021 to 2030 should pay particular attention to the 2030 targets for greenhouse gas emission reductions, renewable energy, energy efficiency and electricity interconnection,” it adds.

However, there will be no punishment for national governments that fail to deliver their national plans. But if “a delivery gap” is identified during the assessment of progress reports, the EC will set out measures to close this gap, including “making a financial contribution to a financing platform set up at Union level, contributing to renewable energy projects and managed directly or indirectly by the Commission”.

Subsidies and tenders

The EC is proposing two key interventions on renewables subsidies that will eliminate the uncertainties that often result from policy changes or threatened policy changes.

The first is that countries will have to provide at least three years of visibility on national support schemes.

“Member States shall ensure that investors have sufficient predictability of the planned support for energy from renewable sources,” states the renewables directive.

“To this aim, Member States shall define and publish a long-term schedule in relation to expected allocation for support, covering at least the following three years and including for each scheme the indicative timing, the capacity, the budget expected to be allocated, as well as a consultation of stakeholders on the design of the support.”

Furthermore, retroactive changes to support schemes, as seen in Spain, will be outlawed, although the wording is far from watertight. “Member States shall ensure that the level of, and the conditions attached to, the support granted to renewable energy projects are not revised in a way that negatively impacts the rights conferred thereunder and the economics of supported projects,” the directive says.

One further change to support scheme rules is that they will have to be partly opened up to renewables suppliers in other member states.

“Member States shall ensure that support for at least 10% of the newly-supported capacity in each year between 2021 and 2025 and at least 15% of the newly-supported capacity in each year between 2026 and 2030 is open to installations located in other Member States.”

Such international support schemes can include tenders and certificate schemes that “avoid unnecessary distortions of electricity markets”, it adds.

The opening up of subsidies and tenders may play an important part in the increased interconnection and ROCs. However, differences in national rules and regulations mean that projects in different countries may not compete on a level playing field.

The first attempt at a cross-border tender — held by Germany in November for 50MW of PV, and including Denmark — was heavily criticised by German renewables bodies. All five winning bids were for arrays on Danish agricultural land — developments that are not allowed in Germany — while tax conditions also favoured the Danes.

Streamlining the permitting process

The EC wants to create national “one-stop shops” to streamline the permitting process and ensure that all new utility-scale energy projects will be processed within three years of the application submission.

“By 1 January 2021 Member States shall set up one or more single administrative contact points which will co-ordinate the entire permit granting process for applicants for permits to build and operate plants and associated transmission and distribution network infrastructures for the production of energy from renewable energy sources,” the renewables directive states.

It adds that this entity “shall guide the applicant through the application process in a transparent manner, provide the applicant with all necessary information, coordinate and involve, where appropriate, other authorities, and deliver a legally binding decision at the end of the process”, and shall also “publish a manual of procedures for renewable project developers”.

Conclusion

It is worth remembering that this highly ambitious package is effectively a draft, and that its thousands of lines of legal language will need to be studied, debated, amended and redrafted countless times over the coming years.

A rapid appraisal and approval is highly unlikely, with opposition expected from nationalist governments such as Poland and Hungary — and Brexit expected to be the primary focus of the EU for the next two years.

Nevertheless, if Europe is serious about weening itself off fossil fuels, a reworked energy package is likely to be signed off eventually, especially as only a qualified majority of nations is required.

Whether it will then be smoothly implemented throughout the EU is, however, another matter.

But whatever happens, the package will undoubtedly be seen as a progressive, pioneering policy document in the global energy transition and the struggle to combat climate change.

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EU energy market design – what you need to know

EU energy market design – what you need to know

IN DEPTH | The European Commission’s plan for a new kind of electricity market built around renewables could revolutionise how the continent — and perhaps the world — creates, supplies and balances its energy, writes Leigh Collins in London

The European Commission’s so-called winter energy package, released at the end of November, may be one of the most important set of policy documents in the history of the electricity industry.

Essentially, it is an ambitious attempt to change the way the energy market has always operated, so that fossil-fuel-fired power — which has been the backbone of the industry for more than 100 years — can be successfully and economically replaced by renewable energy.

If approved — by at least 55% of member states representing at least 65% of the total EU population — the package would come into force across the bloc on 1 January 2020, ushering in a new kind of electricity market that may become a blueprint for the rest of the planet — and be a powerful weapon in the fight against climate change.

While the 4,300-plus pages contain policies on everything from biofuels and transport to research and energy efficiency of buildings, the areas that will directly affect the wind and solar industries can be split into two categories: those that set new rules and guidelines for national energy policies; and those that set out the new design for an EU-wide energy market.

Energy market design

Among the 92 documents unveiled on 30 November are a series of rules for a new energy market design, which can be broken down into several overlapping areas: balancing and intra-day markets; increased interconnection between countries; “regional operational centres” for cross-border transmission and grid stability; regulations to encourage distributed power, self-consumption, storage and demand response; priority dispatch; and rules to discourage capacity mechanisms that pay power producers to keep plants on standby.

Balancing and intraday markets

The way that energy is bought and sold inside the EU will change, most notably through the introduction of balancing markets.

To balance their networks, grid operators currently rely on a range of back-up solutions to ensure they can access last-minute injections of energy when needed, such as pumped-hydro and gas-fired capacity.

But the European Commission (EC) sees these bilateral deals as inefficient, anti-competitive and overly reliant on fossil fuels.

Introducing a balancing market removes these problems and ensures that grid operators buy their last-minute energy boosts on the open market at a price that “reflects the real-time value of energy”.

Significantly, such a system allows the participation of wind and solar generators, industrial storage providers, and even businesses and consumers through energy storage and demand response.

The new internal market regulation proposals specify that balancing markets will “be organised in such a way as to ensure effective non-discrimination between market participants, taking account of the different technical capability of generation from variable renewable sources and demand-side response and storage”.

Intraday and day-ahead markets will also be organised along similar lines, with “minimum bid sizes of 1MW or less to allow for the effective participation of demand-side response, energy storage and small-scale renewables”.

Increased interconnection

One of the keys to redesigning the energy markets is increasing the capacity and availability of interconnections — namely, grid links between countries. This would improve the ability to transport renewable energy, help balance grids and increase competition — thus lowering costs.

The EC says that existing interconnectors are currently being underused due to the focus on national markets, so capacity and energy available on one side of a border is not being transferred to where it might be needed.

“Barriers to cross-border electricity flows and cross-border transactions on electricity markets and related services markets shall be avoided,” states the new internal market directive. “Market rules shall provide for regional co-operation where effective.”

The EC is also calling on all member states to have interconnection in place that allows 15% of their total national electricity output to be exported to neighbouring countries.

“Efficient decarbonisation of the electricity system via market integration requires systematically abolishing barriers to cross-border trade to overcome market fragmentation and to allow [European] Union energy customers to fully benefit from the advantages of integrated electricity markets and competition,” the document says.

Regional operational centres

As part of the move to improve cross-border efficiency, “regional operational centres” (ROCs) will be set up to ensure “optimal utilisation of the grid and better grid stability”.

So rather than a single EU entity overseeing all the national transmission networks, the bloc will be split into an as-yet-unspecified number of cross-border regional bodies — the number and location of which will be determined by the European Network of Transmission System Operators (Entso-E).

These ROCs would ultimately be responsible for matters such as network planning, reserve capacity and energy forecasting across their respective regions.

Such a focus should allow greater interconnection and boost cross-border competition over the medium to long term.

More power to the consumer

In what is perhaps the most significant line in the whole package, the internal market directive states: “All generation, storage and demand resources shall participate on [an] equal footing in the market.”

It goes on to explain: “To provide for a level playing field between all market participants, network tariffs should be applied in a way which does not discriminate between production connected at the distribution level with regard to the production connected at the transmission level, either positively or negatively. They should not discriminate against energy storage, and should not create disincentives for participation in demand response...”

And as we have already seen, consumers will also be able to participate in the new balancing and intraday markets.

Significantly, there will be additional financial incentives for such participation through the removal of price caps on wholesale energy. This will create “scarcity pricing” — high market prices in times when utilities are struggling to find enough energy to meet demand.

“Effective scarcity pricing will encourage market participants to be available when the market most needs it and ensures that they can recover their costs in the wholesale market.”

Additionally, to help consumers take part in these markets (and improve their own energy efficiency), member states will have to provide smart meters to — at the very least — those who want them.

Furthermore, the EC wants to enable “collective self-consumption” for people living in apartment blocks — and for communities to be able to build their own renewables projects. This will require additional, as-yet-undefined rules to allow small communities to compete in tenders with large corporations (although there is no further detail about what such rules might entail).

And to further support distributed generation, storage and demand response — and to ensure that distribution networks are operating optimally and competitively — a new EU-wide oversight entity for distribution system operators will be created.

Capacity mechanisms

Several EU countries have regional and national capacity mechanisms in which utilities are paid to keep underutilised generation capacity on line, to be used in times of need. This capacity generally consists of fossil-fuel power plants — mainly gas, but also coal.

The EC does not like such mechanisms, viewing them as inefficient in terms of energy use and costs, and effectively subsidising the use of polluting fossil fuels.

In the internal market regulation proposal, the commission suggests that “regulatory distortions” are often behind the decision to introduce capacity mechanisms, which can largely be solved by importing electricity from neighbouring countries.

“The most efficient remedies to national generation deficits are often regional solutions, allowing Member States to benefit from generation surpluses in other countries,” the document states. “A co-ordinated European adequacy assessment should therefore be introduced, following a jointly agreed methodology, in order to obtain a realistic picture of possible generation needs, taking into account the integration of electricity markets and potential flows from other countries.”

Demand response should also be put to “maximum use”, with capacity mechanisms only being introduced as a last resort, and “designed so as to minimise distortions to the internal market”.

New power plants will only be eligible to participate in capacity mechanisms if their emissions are below 550 grams of CO per kWh. Dirtier power plants currently being utilised in such schemes will not be allowed to participate within five years of the directive coming into force.

In the medium to long term, all capacity mechanisms will be eliminated.

“When fully embedded in the market structure, short-term markets and scarcity pricing will contribute to the removal of other measures, such as capacity mechanisms, to ensure security of supply,” the document states.

Priority dispatch

One of the most controversial elements of the energy package has been the abolition of priority dispatch — a rule that ensures that output from renewables projects enters the grid ahead of electricity from non-renewable plants.

Yet the likely impact of this new rule may have been overstated.

For a start, priority dispatch will continue for all existing capacity and projects completed before 1 January 2020, as well as deployments under 500kW (up to 2025). Projects demonstrating “innovative technologies” will also be exempt.

The new regulations also state that renewables should only be curtailed as a last resort — only if overall power output is so high that switching off fossil plants isn’t enough.

“Generating installations using renewable energy sources shall only be subject to downward redispatching or curtailment if no other alternative exists or if other solutions would result in disproportionate costs or risks to network security,” says the internal market regulation document.

Crucially, compensation will be paid to the owner of the curtailed renewables facilities by the system operator, meaning that it would not be in the latter’s interests to prevent wind and solar power reaching the grid.

The amount of compensation will be “at least equal to the highest of the following elements”: additional operating cost incurred by the project owner, or “90% of net revenues from the sale of electricity on the day-ahead market that the generating or demand facility would have generated without the curtailment or redispatching request”.

Impacts on national policies

Despite noting that the European Parliament called for an energy mix of 30% renewables by 2030, the new energy union regulation document sets an official binding target of “at least 27%”.

Yet how this will work in practice is unclear , as individual countries will not be set binding national targets.

“A target defined at the [European] Union level would leave greater flexibility for Member States to meet their greenhouse gas reduction targets in the most cost-effective manner in accordance with their specific circumstances, energy mixes and capacities to produce renewable energy,” the document argues.

Instead, member states will have to submit ten-year “integrated national energy and climate plans” by 1 January 2019, with a draft version submitted to the EC by 1 January 2018. “Member States shall take utmost account of any recommendations from the Commission when finalising their integrated national energy and climate plan,” the document states. Progress reports will then have to follow every two years.

“The national plans covering the first period from 2021 to 2030 should pay particular attention to the 2030 targets for greenhouse gas emission reductions, renewable energy, energy efficiency and electricity interconnection,” it adds.

However, there will be no punishment for national governments that fail to deliver their national plans. But if “a delivery gap” is identified during the assessment of progress reports, the EC will set out measures to close this gap, including “making a financial contribution to a financing platform set up at Union level, contributing to renewable energy projects and managed directly or indirectly by the Commission”.

Subsidies and tenders

The EC is proposing two key interventions on renewables subsidies that will eliminate the uncertainties that often result from policy changes or threatened policy changes.

The first is that countries will have to provide at least three years of visibility on national support schemes.

“Member States shall ensure that investors have sufficient predictability of the planned support for energy from renewable sources,” states the renewables directive.

“To this aim, Member States shall define and publish a long-term schedule in relation to expected allocation for support, covering at least the following three years and including for each scheme the indicative timing, the capacity, the budget expected to be allocated, as well as a consultation of stakeholders on the design of the support.”

Furthermore, retroactive changes to support schemes, as seen in Spain, will be outlawed, although the wording is far from watertight. “Member States shall ensure that the level of, and the conditions attached to, the support granted to renewable energy projects are not revised in a way that negatively impacts the rights conferred thereunder and the economics of supported projects,” the directive says.

One further change to support scheme rules is that they will have to be partly opened up to renewables suppliers in other member states.

“Member States shall ensure that support for at least 10% of the newly-supported capacity in each year between 2021 and 2025 and at least 15% of the newly-supported capacity in each year between 2026 and 2030 is open to installations located in other Member States.”

Such international support schemes can include tenders and certificate schemes that “avoid unnecessary distortions of electricity markets”, it adds.

The opening up of subsidies and tenders may play an important part in the increased interconnection and ROCs. However, differences in national rules and regulations mean that projects in different countries may not compete on a level playing field.

The first attempt at a cross-border tender — held by Germany in November for 50MW of PV, and including Denmark — was heavily criticised by German renewables bodies. All five winning bids were for arrays on Danish agricultural land — developments that are not allowed in Germany — while tax conditions also favoured the Danes.

Streamlining the permitting process

The EC wants to create national “one-stop shops” to streamline the permitting process and ensure that all new utility-scale energy projects will be processed within three years of the application submission.

“By 1 January 2021 Member States shall set up one or more single administrative contact points which will co-ordinate the entire permit granting process for applicants for permits to build and operate plants and associated transmission and distribution network infrastructures for the production of energy from renewable energy sources,” the renewables directive states.

It adds that this entity “shall guide the applicant through the application process in a transparent manner, provide the applicant with all necessary information, coordinate and involve, where appropriate, other authorities, and deliver a legally binding decision at the end of the process”, and shall also “publish a manual of procedures for renewable project developers”.

Conclusion

It is worth remembering that this highly ambitious package is effectively a draft, and that its thousands of lines of legal language will need to be studied, debated, amended and redrafted countless times over the coming years.

A rapid appraisal and approval is highly unlikely, with opposition expected from nationalist governments such as Poland and Hungary — and Brexit expected to be the primary focus of the EU for the next two years.

Nevertheless, if Europe is serious about weening itself off fossil fuels, a reworked energy package is likely to be signed off eventually, especially as only a qualified majority of nations is required.

Whether it will then be smoothly implemented throughout the EU is, however, another matter.

But whatever happens, the package will undoubtedly be seen as a progressive, pioneering policy document in the global energy transition and the struggle to combat climate change.

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